TARP, the Bailout Fund Everyone Loves to Hate, Could Make Its Exit Early

WASHINGTON — While testifying on Capitol Hill last week about the government’s bank bailout program, Treasury Secretary Timothy F. Geithner likened the hearing to a eulogy for the initiative.

The comment, which at the time seemed like wishful thinking, now appears prescient.

In an 11th-hour maneuver this week, the Obama administration and Congressional Democrats abruptly proposed phasing out the deeply unpopular bailout program, enacted in the depths of the financial crisis. Spending authority under the Troubled Asset Relief Program, as the bailout is called, would be redirected instead to pay for the financial regulation legislation nearing the finish line.

The action, which the Congressional Budget Office projected would ultimately yield $11 billion in taxpayer savings, was taken to mollify a few moderate Senate Republicans whose support is essential to ratifying a House-Senate compromise on a far-reaching overhaul of the financial system.

Instead of a five-year, $19 billion fee imposed on banks, the latest proposal would seek to avoid placing a new cost on taxpayers by phasing out TARP early and requiring the Federal Deposit Insurance Corporation to collect more money from banks, especially big ones.

But Republican opponents quickly denounced the action as a gimmick. “Blatant accounting fraud,” said Senator Richard C. Shelby of Alabama, the top Republican on the Senate Banking Committee. “A ridiculous scheme,” said Representative Spencer Bachus, also of Alabama, his counterpart on the House Financial Services Committee.

A close look at the figures suggests that while some budgetary conjecture — even wizardry — was involved in projecting the taxpayer savings from ending the program three months early, the action is more than just symbolic.

Ending the program early would bring to fruition what was already under way. No new money was being disbursed to bail out banks, automakers or financial institutions. While the original law authorized $700 billion to prop up ailing institutions, as of last week the government had disbursed $386 billion. New program money — not enough, critics say — is being spent to help homeowners help avoid foreclosure.

About half of that sum has been repaid, most notably by giant banks like Citigroup and Bank of America. The auto industry, which has received $80 billion from the fund so far, and the American International Group, which was given $48 billion under the program in addition to billions in other aid, account for most of the money that has yet to be recouped.

The proposal would prohibit using the bailout money for any new initiative, limiting the Treasury to programs that had already been announced, like foreclosure prevention. It also would specify that the Treasury could not, as the original law permitted, hand out for a second time money that had been repaid. Under the original law, the $700 billion was like a revolving line of credit with a limit on the amount of money that could be out at any one time, not a cap on cumulative disbursements.

The proposal would cap the amount that could be used over the life of the program at $475 billion. Treasury officials said that cap was manageable but consequential; officials had estimated that they might have to give out as much as $536 billion in total out of the original $700 billion.

After a series of complex calculations, budget experts projected that the latest proposal would reduce the ultimate cost to taxpayers — that is, the money that will most likely never be repaid — by about $11 billion from the current estimate of about $105 billion.

Mr. Geithner’s top aides engaged in months of debate over the question. Two counselors to Mr. Geithner, Jake Siewert and Lewis A. Sachs, who has since left government, argued that the program was politically toxic and that new financing was not likely to be needed.

Other advisers, like Lewis S. Alexander and Gene Sperling, wanted to keep the program to preserve the Treasury’s capacity to deal with unforeseeable events. They were joined by Herbert M. Allison Jr., assistant secretary for financial stability, who manages the program, and Michael S. Barr, assistant secretary for financial institutions.

As it moved slowly through the Senate, Treasury officials contemplated ending the program as one concession they could offer to secure votes, according to an adviser to Mr. Geithner who asked for anonymity because he was not authorized to speak about high-level deliberations.

“It was an idea to give the bill a little more acceleration,” the adviser said.

But the idea was shelved when the Senate managed to pass its version of the bill in June.

That changed this week, when Senator Scott Brown, a Massachusetts Republican whose support was vital to the Senate’s initial passage of the legislation, objected to the $19 billion bank fee included in the compromise legislation produced by a joint Senate-House conference committee. He declared he would not vote for the compromise if it included the tax.

So the bill’s primary shepherds, Senator Christopher J. Dodd of Connecticut and Representative Barney Frank of Massachusetts, both Democrats, hurriedly but briefly reconvened the conference committee Tuesday to modify the bill.

Along with the TARP provision, the newest version of the legislation would require the F.D.I.C. to hold greater reserves in its insurance fund equal to 1.35 percent of insured deposits, up from 1.15 percent by 2020, financed by assessments on banks with more than $10 billion in assets. The provision is intended to save $5.7 billion, but critics said that it amounted to a tax on big banks by another name.

Mr. Brown praised the change on Wednesday but stopped short of saying whether he would support the bill.

A version of this article appears in print on July 1, 2010, on Page B4 of the New York edition with the headline: TARP, the Bailout Fund Everyone Loves to Hate, Could Make Its Exit Early. Order Reprints|Today's Paper|Subscribe